What to Expect on the CFA Level I Exam

The Chartered Financial Analyst (CFA) is one of the more frequently sought after designations for investment professionals. However, becoming a CFA charter holder is not for the faint-hearted nor the uninterested. The journey to becoming a CFA charter holder is long, and it tests not only your knowledge of the subject, but also your endurance, diligence, and will. According to the CFA Institute, the current program is best described as a self-study, distance-learning program that takes a generalist approach to investment analysis, valuation and portfolio management, and emphasizes the highest ethical and professional standards.

The CFA program consists of three exams: CFA Level I, Level II and Level III. As a CFA candidate, you are required to pass each of these exams and you must meet certain work requirements as set out by the CFA Institute. In December 2017, the passing rate for the Level I exam was 43%.

The curriculum for each of these three levels is designed to test you on a broad array of skills considered to be most relevant for investment professions. In this article, we will focus on the CFA Level I exam.

Exam Structure

The exam is a six-hour exam, broken into a morning and afternoon session, each being three hours long. The exam consists of 240 multiple-choice questions: 120 questions in the morning session and 120 questions in the afternoon session. You should allow approximately 90 seconds per question, depending on how well you know the topics. All of the multiple-choice questions are free-standing (i.e., they are not dependent on each other). For each question, there are three possible choices provided. The questions are crafted intelligently, such that the incorrect choices reflect common mistakes in calculation or logic. So, you have to be very careful while selecting the right choice. Aim to answer all questions, as there is no penalty for incorrect answers. Additionally, become comfortable with your calculator and its functions, as its features will be needed to complete some of the questions.

Exam Curriculum

The exam focuses on basic knowledge and comprehension of tools and concepts of investment valuation and portfolio management. The curriculum consists of 10 topics that are grouped into four areas, specifically: ethical and professional standards, investment tools, asset classes, and portfolio management and wealth planning.

The following table provides the weights of these topics and broad areas for the Level I exam.

Topic Area

Level I

Ethical and Professional Standards (total)

15

Investment Tools (total)

50

Corporate Finance

7

Economics

10

Financial Reporting and Analysis

20

Quantitative Methods

12

Asset Classes (total)

30

Alternative Investments

4

Derivatives

5

Equity Investments

10

Fixed Income

10

Portfolio Management and Wealth Planning (total)

7

Total

100

Let's take a brief look at each of these 10 topics.

Ethics and Professional Standards

This section covers the code of ethics, professional standards and the Global Investment Performance Standards (GIPS). This is a very important section and you will be asked approximately 36 questions on the subject. The Institute itself takes this section very seriously. If you score low or close to the minimum passing score on all other topics, then your score on ethics could determine whether you pass or fail. One advantage of studying ethics well is that it also helps with your Level II and III exam preparation.

Quantitative Methods

While ethics is more scenario-oriented and easy to follow, this section could be intimidating for some students. You don't need a Ph.D. in mathematics to do well in quants, but having a stats background will certainly be helpful. You can expect around 28 to 30 questions related to quants. The topics covered are geared toward providing you the knowledge of analytical tools that are essential for material on fixed income, equities and portfolio management. The key topics covered are time value of money, performance measurement, statistics and probability basics, sampling and hypothesis testing and correlation and linear regression analysis.

Economics

The economics section tests your knowledge on basic micro and macroeconomic concepts. If you studied economics in college, then you will find this material very familiar. Without a background in economics, this material can be challenging, especially macroeconomics, which employs the use of graphs and x and y curves to illustrate concepts related to the economy. Economics comprises 10% of the syllabus.

The Level I exam only introduces you to the basics of portfolio management. The important concepts are Modern Portfolio Theory and the Capital Asset Pricing Model. There will be about 17 questions in this section. This section acts as a preparation for Levels II and III, where the focus is more on the application of all your knowledge on portfolio management.

Equity Investments

You can expect about 10% of questions to be on equities. The curriculum for equities covers equity markets and instruments, and tools and techniques for valuing companies. The majority of the questions will be focused on valuing and analyzing companies.

The Bottom Line

Overall, the CFA Level I exam is well-balanced, with a wide spectrum of topics. Some topics may require proportionally more time to study than others; however, what's important is to plan your studies and stay with the plan.

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